Cash, Credit, or Cell Phone?

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Cash may still be king, but on the streets of Japan there’s anew rival for the throne. Millions of people there use their mobile phones to buy everything from vending-machine sodas to train tickets. To pay, a user passes a chip-enabled handset over a compatible reader. Credit is then deducted from a stored-value account provided by NTT DoCoMo, Japan’s dominant cell-phone carrier. Transactions take a fraction of a second to complete, pleasing customers and merchants alike. In addition, consumers can use their phones to buy products over the mobile Web, or download digital music. And losing your phone is not the same as losing your wallet, because the handset can be remotely disabled.

Japan is clearly in the technological vanguard, again, but mobile payments are catching on throughout Asia and Europe. Juniper Research predicts that remote and in-store mobile-phone payments will total $375 billion by 2013, up from a current $57 billion. Although the United States is late to the mobile-payments party, its use of mobile banking has exploded in the past two years. TowerGroup, the independent research arm of MasterCard, thinks that’s the game-changing event that will finally usher in mobile payments here by 2011.”Mobile payments will become an extension of mobile banking once different constituents coalesce to form a business case that makes sense,” says Virginia Garcia, senior research director at TowerGroup.

To date, however, the convenience of simply waving such a device in front of a compatible reader has not ignited the U.S. market. That’s because American consumers are already flush with credit and debit cards, many of which don’t even require signatures for purchases under $25. And merchants are heavily invested in the point-of-sale infrastructure that goes with them.

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Advocates of mobile-payment systems that rely on cell phones say such an approach has advantages over contactless cards. First, handsets can carry multiple payment instruments, making them the electronic equivalent of a credit card–stuffed wallet. Loyalty cards and coupons can also be loaded on them. Second, phones are integral to people’s lives — especially young adults. “The mobile phone keeps coming back as the thing they spend time with,” says James Anderson, a MasterCard spokesman.

Retailers may be a tougher sell. Although throughput and customer spending both increase with contactless payments, margin-strapped merchants are waiting for critical mass before they’ll invest in new point-of-sale terminals. “It’s going to take consumers walking into a store and having only their mobile phones as a payment method” before retailers will be convinced, says Bruce Cundiff, director of payments research at Javelin Strategy & Research.

Banking on Banking

While contactless cards have faltered in the United States, mobile-phone banking has taken off. At the end of 2007, 1 million people were using mobile banking. That number is now more than 5 million, and it’s expected to reach 42 million by 2012, according to TowerGroup. Bank of America’s (BofA) program alone totaled more than 1 million customers in June, about a year after it launched. The browser-based application allows them to check balances, pay bills, view transactions, find branches and ATMs, and transfer funds from their mobile phones.

As cell-phone finance becomes the norm, BofA would like to embrace mobile payments but says that there are technical challenges in getting a payment application downloaded and working securely on the vast array of mobile devices offered by U.S. cell-phone carriers. In Japan, where DoCoMo dominates, that was a breeze.

But Doug Brown, senior vice president of E-commerce at BofA, is encouraged by Apple’s iPhone application store, which allows users to easily download software to their phones. Although it doesn’t carry a payment application, he says, “those are the types of developments we look for to change customer behavior and expectations.”

In the meantime, MasterCard is among the many players that are investing in peer-to-peer mobile payments. Companies like Obopay and PayPal have developed systems that allow users to transfer payments to one another for, say, settling dinner bills, paying the gardener, or splitting the rent. MasterCard’s Anderson says those solutions will roll out aggressively next year.

Along with the technical questions, however, come the commercial ones. A clear business model for mobile payments has yet to emerge. While credit-card companies have been the driving force, cell-phone carriers are also in the mix and already use mobile systems to accept payment for digital downloads such as ringtones. Will they cut the banks in for a piece of the action, or will they in fact be kept from getting more involved by current banking and credit laws? “This is such a heavily regulated market, it’s hard to believe any telco would want any part of that,” says TowerGroup’s Garcia. “Banks are going to stay in command.”

Some nascent carrier/credit partnerships have emerged, but it’s early days. One thing seems clear, however: As the cell phone becomes the go-to device for connectivity, information, and entertainment, can commerce remain out of the mix for much longer?